Fuel expenses crowding out consumption demand
India’s economic recovery could be delayed due to the rising financial stress on households, and with inflation adding to their woes, a State Bank of India (SBI) report has called for urgent cuts in fuel taxes arguing that high oil prices not only spur further inflation but are also forcing consumers to spend less on other items.
While retail inflation moderated marginally from 6.3% in May to 6.26% in June, the SBI research note issued on Tuesday morning said this was driven by pan, tobacco and intoxicants, which eased to 4% from 10% in May, but food prices, especially protein sources like egg, milk, pulses and oils and fats, are still exhibiting an increase in prices.
“Oil and fat inflation have risen to 34.8% in Jun’21 from 30.9% in May’21 thus showing that the government basic import duty cut on crude palm oil to 10% from 15% and refined palm oils to 37.5% from 45% is not having much impact,” SBI group chief economic advisor Soumya Kanti Ghosh pointed out.
Rising transport costs will eventually spike consumer food inflation further, the report said, citing higher gasoline prices and regional truck driver shortages that are driving up road transport costs even as ocean freight rates have risen multiple times over since the onset of COVID-19.
SBI expects crude oil prices to firm up further after the recent meeting of the OPEC+ alliance was cancelled, estimating that every 10% increase in petrol pump prices in Mumbai, leads to a 0.50% increase in the Consumer Price Index (CPI).
While the rising crude oil prices pose challenges for the Union government as it tries to balance the need for extra revenue from high excise duties with rising fuel inflation and its impact on overall inflation, SBI said consumption trends in June indicate people are cutting back spending on other goods to be able to fork out the higher fuel costs.
“In June… spend on health expenditure has substantially reduced but expenditure on oil has more than crowded out the spending on other non-discretionary items, like grocery and utility services that was the trend in earlier months which is worrisome. In fact, the share of non-discretionary spend has jumped to 75% in June from 62% in March,” Mr. Ghosh said, citing an analysis of monthly credit card spending data from January 2020.
“This demands urgent cut in oil prices through tax rationalisation, otherwise consumers’ non-discretionary spending will continue to get distorted and crowd out discretionary expenses. This will also impart an upward bias in inflation,” he emphasised.
Household distress rising
The second COVID-19 wave, that began in March 2021, coincided with a significant dip in bank deposits, SBI research suggested, with the number of districts seeing outflows of deposits almost doubling from the first wave period. Overall bank deposits in the first quarter of 2021-22 had declined by 38% by June 18, compared to a growth in deposits recorded in the April to June period of last year.
Household debt levels have also shot up, so the recovery will be delayed as there is an indication of debt financed consumption in India, Mr. Ghosh said. The household debt as a percentage of GDP sharply increased to 37.3% or ₹73.6 lakh crore in 2020-21 from 32.5% of GDP or ₹66.1 lakh crore in 2019-20.
“This indicates the level of household distress in India. The fact is also validated from the decline in financial savings. According to preliminary RBI estimates, the household financial savings rate in the third quarter of 2020-21 has come down to 8.2% of GDP from 21% and 10.4% in the previous two quarters. Interestingly, the savings rate in U.S. has gone to 34% of GDP in April from 8% in December 2019,” the report pointed out.
“This indicates how delayed the recovery will be in India compared to U.S. as we are pre-dominantly a domestic consumption based [economy],” it concluded.
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